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Restructured National Oilwell Is a Good Value Investment

August 29, 2014 | About:
Value Investor

Value Investor

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National Oilwell Varco (NOV) provides equipment and components for oil & gas drilling, production and oilfield services. Since April 1, 2014, the company is operating under four segments: Rig Systems, Rig Aftermarket, Wellbore Technologies and Completion & Production Services.

The Rig Systems segment makes and supports capital equipment and integrated systems needed to drill oil and gas wells on land and offshore. Rig Aftermarket segment provides aftermarket product and services to support land rigs and offshore rigs. The company’s Wellbore Technologies segment designs, manufactures, rents and sells a variety of equipment and technologies used to perform drilling operations and offers services that optimize their performance whereas the Completion & Production segment primarily supports service companies and oil and gas companies.

In this article I will discuss the company’s focused operations with factors which make it an attractive buy.

Strong 2Q14 financials

There has been an 11% increase in revenue q-o-q in 2Q14 against the industry average of 5.7%, with a 23% increase in net income in the same time period. Factors, which I consider important financial indicators, are the company’s investment returns.

National Oilwell Varco has a dividend yield of 2.2%, return on equity and return on capital of 12% and 10.4% respectively. National Oilwell Varco also has an impressive cash flow from operating activities and free cash flow numbers.

OCF has increased by 54% to $1,359 million over the last quarter with free cash flow increase of 51% to $1,059 million. This increasing cash flow also suggests that the company has been managing its business effectively and is well positioned to create shareholder value for its investors.

In addition to the cash flow, debt position of the company also looks decent. The company’s debt/equity and leverage ratios are below industry average of 0.3 and 1.7. I thus believe that the company has strong fundamentals which in combination with the reasons discussed below make it a good buy.

A restructured energy giant

Clay Williams joined National Oilwell Varco as a chairman, president and CEO since February. And it is interesting to note that the company has undergone a massive company spinoff and a big internal reorganization.

The spinning off of its distribution business, now listed as DistributionNow (DNOW) could be considered the company's best move. This is primarily because the company's distribution business  used to operate through a different business model.

Also, when compared with other distribution companies, NOV’s earning stream was trading at a discount. Thus to unlock the hidden value the spinoff was essential. In addition to this the spinoff has helped NOV to restructure its business into three operating units.

The reorganization has also increased customers as the business is much more customer-centric, navigable and transparent in terms of their strategic initiatives. I thus believe that this restructuring would help NOV to better understand each segment and hence create a well-thought long-term strategies to meet their goals.

Valuations

Apart from the company’s strong financials and a restructured and focused business, valuations also make this giant an attractive investment.

The company currently trades at an EV/EBITDA of 7.8 against Cameron International Corporation’s (CAM) 10.6 and Forum Energy Technologies’ (FET) 11.9. Even forward valuation for National Oilwell Varco is attractive with 2015 EV/EBITDA of 7 against Cameron’s 8.7 and Forum’s 8.4.

In addition to an attractive forward EV/EBITDA, the company also looks impressive in terms of its P/E ratio. Even at a price $84, National Oilwell Varco is trading at a low PE of 14.4 and with an EPS growth of 13.2%, a PEG of around 1.0 does not look expensive at all. National Oilwell Varco thus looks attractive in terms of valuations. I believe the company with its more focused operations has room to grow and give good returns to its investors.

Conclusion

The spinoff has resulted in a 77% dividend increase and with a more structured business and strategic goals.

I feel the company has a long way to go in terms of value creation. Also, NOV is trading at fairly low valuations, which is an important reason to consider owning this stock.

About the author:

Value Investor
A value investor.

Rating: 4.5/5 (2 votes)

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Comments

evanhlea
Evanhlea - 1 month ago

I'd like to add they have a massive competitive advantage in their industry. They control about 80% of the market share in the floater market. Their ticker symbol has been referred to as , "No Other Vendor" because of their dominance of the industry. They also have bought up several competitors in the past 10 years leaving them in an even more adventageous position. They have deep talent in their management positions, great innovation, and long track record of success and good business stewardship. Their push toward standardization has given them a virtual monopoly, which comes with repeat business and pricing power. Their history goes all the way back to 1841, and their earnings, income, and cash flow continue to grow steadily each period. This is a undervalued, top notch business that is good for a long-term investment. Oil isn't going away anytime soon. I too recommend picking it up.

"National Oilwell enjoys an estimated 80% share of the market for "floater" packages: complete systems for drilling deep-sea wells. It owes that position, and its outsize stock returns of the past decade, to selling shipbuilders and drillers on the benefits of standardization. In past decades, offshore rigs were largely custom jobs plagued by cost overruns, uneven performance, and slow parts deliveries. Newer rigs use industry-standard components, which have driven down manufacturing costs, increased reliability, and kept replacement parts in steady supply.

As the leader in the standardization push, National Oilwell has collected the bulk of new-equipment orders and secured a lucrative parts trade."

http://online.barrons.com/news/articles/SB50001424053111904742804579284783243236174

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